Operational creditors with zero liquidation value not entitled to proceeds under resolution plan despite Section 30(2)(b) IBC claims

The NCLAT Principal Bench dismissed an appeal by operational creditors challenging a resolution plan approval. The appellants argued they were entitled to proceeds under the resolution plan despite their liquidation value being nil. The tribunal held that operational creditors are only entitled to minimum entitlement under Section 30(2)(b) of IBC, which in this case was nil given zero liquidation value. The Committee of Creditors (CoC) exercised commercial wisdom in not allocating amounts to other creditors while following the waterfall mechanism under Section 53. The tribunal found no material irregularity or legal contravention by the CoC, emphasizing that adjudicating authorities cannot substitute commercial wisdom unless there are express legal violations, reaffirming Supreme Court precedents on CoC supremacy.

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Issues Involved:
1. Treatment of Operational Creditors' claims under the resolution plan.
2. Compliance with the provisions of the Insolvency and Bankruptcy Code (IBC) and related regulations.
3. Judicial review of the Committee of Creditors' (CoC) commercial decisions.

Summary:

Issue 1: Treatment of Operational Creditors' claims under the resolution plan

The appellants, who are Operational Creditors of M/s Jaycon Infrastructure Ltd, challenged the resolution plan approved by the Adjudicating Authority, arguing that their claims were admitted in full by the Resolution Professional (RP) but were paid nil under the resolution plan. They contended that this was discriminatory since Financial Creditors received 16.5% of their claims, while Operational Creditors faced a 100% haircut. They argued that the IBC provisions do not support such discriminatory treatment and that this goes against the primary objective of the IBC to balance the interests of all stakeholders.

Issue 2: Compliance with the provisions of the Insolvency and Bankruptcy Code (IBC) and related regulations

The appellants argued that the Adjudicating Authority misinterpreted the IBC by suggesting that Operational Creditors could be paid nil if the liquidation value payable to them was nil. They contended that the resolution plan did not comply with Section 30(2) read with Section 53 of the IBC and Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016. They claimed that the SRA failed to show how the interests of all stakeholders were balanced, and that Financial Creditors cannot be paid proportionately higher than Operational Creditors.

Issue 3: Judicial review of the Committee of Creditors' (CoC) commercial decisions

The respondents argued that the appeal was not maintainable as the approval of the resolution plan lies solely within the domain of the CoC's commercial wisdom, which cannot be substituted by the Adjudicating Authority. They cited several Supreme Court judgments reaffirming the primacy of the CoC's commercial decisions. They also referenced the Tribunal's judgment in Dharmindra Constructions Pvt. Ltd. & Anr. v. Rajendra Kumar Jain, which held that Operational Creditors are entitled to a minimum of the liquidation value, which in this case was nil. Therefore, the impugned order did not suffer from any material irregularity.

Tribunal's Findings:

The Tribunal noted that the Adjudicating Authority had considered the compliance of the resolution plan with the relevant sections of the IBC and related regulations. The liquidation value of the Corporate Debtor was Rs.11.53 crore, while the admitted claim of the secured Financial Creditor was Rs.70.24 crore. The resolution plan provided nil payment to other creditors, including the appellants, which was challenged as discriminatory.

The Tribunal referred to the Supreme Court's judgment in Essar Steel India Ltd., which emphasized the limited judicial review of the CoC's commercial decisions and the need to balance the interests of all stakeholders. The Tribunal concluded that the appellants, as Operational Creditors, were entitled to the minimum liquidation value, which was nil in this case. The CoC's decision to allocate nil to other creditors was within its commercial wisdom, and there was no material irregularity or contravention of law.

Conclusion:

The Tribunal upheld the resolution plan approved by the Adjudicating Authority, finding no merit in the appeal and dismissed it without costs.

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